Getting Clients To Bankroll Products

Lacking the funds for research and development, many young companies have trouble bringing new products to market. They can't -- or don't want to -- sell equity, and they're not able to arrange debt. But the Root Group, a $1.6-million business specializing in computer-networking systems, recently got the resources it needed by taking an unusual tack. Indeed, more than two-thirds of the money the Boulder, Colo., company required to develop its new networking-software product was supplied by a major client.

Root got the idea for the product, notes president Bill Pachoud, when its client (a successful electronics company) approached him last winter with a technical problem. Clearly, Pachoud says, three-year-old Root could have suggested working on a time-and-materials basis, as it typically does. But since the problem seemed like one other companies would soon face, he proposed a different arrangement: Why not create a full-blown product, furnish the client with the initial version, and then sell the same software to others as well?

The client paid Root $50,000 over a four-month period to help cover development expenses. And Root pledged to provide ongoing enhancements and technical support once the initial product was up and running at the client's site, making the deal more attractive. In the meantime Root is free to sell the product to other users without restriction.

While the tab for the development work ended up at about $70,000, Root hopes to make up the difference when it begins selling the product this winter for around $200. "It's great," Pachoud says, "since we absorbed very little of the risk."